About The Blog

Debate at the intersection of business, technology and culture in the world of digital money, both commercial and government, a blog born from the Digital Money Forum in London and sponsored by Consult Hyperion

6 posts from February 2009

[Dave Birch] I've always been interested in the potential for micropayments and the idea of a metaphorical "red button" on a keyboard that means "pay the owner of the web page I'm looking at 10 pence" or something similar. There are many times when I've come across an interesting or useful blog post, link to a magazine article or something and I would have happily paid a small amount for more detail, more links, more references. I certainly can't be bothered to type in usernames and passwords, credit card details or to take out subscriptions though. So I have the sense -- despite all of the reservations about micropayments, which I understand fully -- that there is a market out there and a synergistic link between an effective low-value online payment system and a vigorous and innovative sort-of-content but also sort-of-relationship set of businesses on top of it. This view has been a minority view for some time, because the advertising-supported model came to dominate the content space. Yet, as I said last year, that model is not obviously the best solution, nor is it an immutable law of the web:

Therefore, while it is true to say that there is little demand for new micropayment mechanisms to support paid content at this time, I would not rule out a resurgence of interest in more sophisticated micropayment schemes in the future.

While watching Jon Stewart's Daily Show the other night, my interest was re-kindled by his interview with Walter Isaacson of the Aspen Institute. Many years ago I used to be one of the lecturers/facilitators for the European branch of that august body, the then Nortel Aspen Institute, so he caught my ear (so to speak) when he started talking about paid content, journalism and the future of news. A quick google revealed that he'd actually written a story about this for Time magazine, in which he referred to the odd paradox of content that has been noted here before.

Thus we have a world in which phone companies have accustomed kids to paying up to 20 cents when they send a text message but it seems technologically and psychologically impossible to get people to pay 10 cents for a magazine, newspaper or newscast

There are some immediate explanations that spring to mind: perhaps people ultimately value communications more than content (which I believe to be true to a great extent) or perhaps the content isn't actually worth 10 cents (which I also believe to be true to some extent, especially since I'm writing this on a train, having finished reading the free newspaper given to make at the station) or perhaps people just won't pay for news but that means nothing for content in general (entirely plausible. But the technological determinist in me is drawn to another explanation: people won't pay 10 cents for stuff on the Internet because they can't, whereas they will spend $2 for a stupid ringtone on their phone because they can. Perhaps the technology is to blame. Isaacson goes on to say just that.

We need something like digital coins or an E-ZPass digital wallet — a one-click system with a really simple interface that will permit impulse purchases of a newspaper, magazine, article, blog or video for a penny, nickel, dime or whatever the creator chooses to charge.

Put the news part of this to one side and ask why don't we have this? It's not like micromint, hashcash, millicent et al didn't work. In fact many of them had very good technology inside them and many of them had some great ideas built in (I always liked the way that millicent, for example, changed the cursor to a "$" sign when you moved the mouse over a link that you would have to pay for). And it's not like no-one has a working micropayment system: on my iPhone I pay for data, for voice, for applications, for text and I make 59p micropayments for music all the time. But can the iTunes example tell us any more? Clay Shirky, who has been consistently sceptical about micropayments asks a very specific question about this:

small payments survive in the absence of a market for other legal options. What’s interesting about ITMS, though, it that it contains other content that illustrates the dilemma of the journalists most sharply: podcasts. Apple has the machinery in place to charge for podcasts. Why don’t they?

This is a good point, but is Clay right? I already do pay for podcasts -- I support the Conversations Network -- and, oddly, there is a lot of podcast content that I would pay for that is actually free -- some of my favourite podcasts, for example, such as Dan Carlin's Hardcore History or Skeptoid -- despite the existence of a working payment system through my iPhone, so clearly there is another business model emerging as well, one that was sagely summarised many years ago by Esther Dyson as "content is an advertisement for a relationship" and it's the relationship that is going to be monetised, not the content at all. But let's focus on paid content for a moment. Some of the responses to Isaacson's piece have been rather negative, and there's no doubt that the relationship between content, journalism and the net is a complex one.

I'm not saying that problem is insoluble. Just that, as far as I know, no one has solved it yet

We can begin to look for solutions by narrowing down the options. I suppose I start from the general perspective that "proper" news is a good thing and that we ought to have some of it instead of the musing of the celebretariat.

There’s no guarantee that private demand will produce the socially optimal quantity of investigative political reporting.

If a free press is a public good that cannot be satisfied by private demand, then it doesn't matter one way or the other whether we use micropayments or not: we will have to come up with more radical solutions to the problem of news provision (as opposed to the narrower problem of how to save newspapers).

Newspaper readers have never paid for the content (words and photos). What they have paid for is the paper that content is printed on.

So it may well be that news is a very special case of content and that it needs very special solutions. Indeed, I will be chairing a seminar on this topic at the Free University in Brussels on 19th March 2009 (for the Fleet project) and hope to develop my opinions further there.

[Paul Makin] In further proof of the power of the mobile phone, our favourite mobile payments scheme - M-PESA – is in the news again. The BBC has this interesting article about a new scheme that uses SMS to distribute small units of work (translation of short phrases into local languages such as Giriami, a regional language in Kenya) to people who have registered:

Txteagle is making it possible for many people in countries like Kenya to earn small amounts of money by completing simple tasks like translations or transcriptions......All payments for completed tasks are received by mobile phones, using M-PESA, a popular mobile banking service.

[Dave Birch] Do you need a bank to be 'banked'? There was a splendid seminar on this topic at Chatham House. After an introductory address from some guy from the government who had to return to the Commons for important business and so wasn't able to stay for questions, there was a terrific panel discussion with Robert Annibale (Global Head of Microfinance, Citigroup), Nick Hughes (Global Head of Intl. Mobile Payment Solutions, Vodafone), Alexia Latortue (Senior Microfinance Specialist, CGAP), Alastair Lukies (CEO, Monitise) and Brian Pomeroy (Chairman, Financial Inclusion Taskforce). What I found interesting about the panel -- apart from the fact that 60% of the panel members are in our podcast library -- was their position that technology is no longer an issue and that (first) regulation and (second) business model are the key challenges.

Incidentally, since Robert was on the panel, I couldn't help but mention John Reed's famous statement that "one day, banking will be a line of code in a big network" when I asked a long and boring question about what is meant by "banking" and what the goal of banking about banks might be (if not something concrete like reducing the total social cost of payments). I was trying to ask whether the narrow banking meme might grow to divide the banking business even further: a kind of narrower banking that doesn't include payments, which would then be regulated separately.

One phrase that caught my ear, in a very positive way, was "risk-based approach to know-your-customer". In other words, I think, it's time to begin to resolve the implicit tension between financial exclusion and financial inclusion agenda in a common sense way. It's one thing to recognise the legitimate law enforcement and regulatory requirements for identification and authenticaton and another to insist that these requirements are met in the tightest possible way in all circumstances. The truth is that bringing people inside the tent, given the data exhaust from electronic payments, delivers far greater overall benefits to society than trying to keep people out of the tent. In other words, stringent rules about terrorist financing and so forth mean that the poorest people stay excluded because it becomes complicated and expensive to deliver services to them. I think that we should start looking at a global exclusion for pre-paid accounts below a certain level (say 500 euros) in return for increased monitoring to patterns, transfer and behaviour.

By the way, the guy from the government, the Right Honourable Douglas Alexander MP, said that if all remittances were sent by mobile payments instead of through banking and money transfer networks that would save $13 billion for some of the poorest people in the world. He also announced a programme called Facilitating Access to Financial Services through Technology (FAST) that will, amongst other things, help to persuade government in developing countries to stop killing efficient and effective mobile payment services through excessive regulation: he mentioned a couple of examples such as Kenya, discussed below, and India, where the RBI has drawn up mobile payment regulations that will excude non-bank competitors from a potentially vast market.

[Dave Birch] We implicitly associate the notion of payments with the notion of banks but, as I often point out, this reflects current arrangements not laws of physics. Michael Linton's mention of the "Irish bank strike" example of a modern economy functioning without bank services at the retail level reminded me of this. He points out:

For several months, almost a year from start to finish, the Irish did it all with their own paper and no banks.

What's the story? Well, between 1966 and 1976 there were three major "all out" bank strikes in Ireland that shut the retail banks for (in total) a year. There is a super case study, written a few years ago, on this called "Money in an Economy Without Banks" by Antoin Murphy of Trinity. I've sometimes referred to it when challenging people to think harder about how the payment system works, but of course it's taken on a new lease of life in current circumstances and in the context of the "utility vs. casino" strategy discussions.

Back to Ireland. The case study notes that about four-fifths of the money supply disappeared because of the bank strikes, so the general public were left with the notes and coins in their pockets and nothing else. How did this society function? Since people could not go to the bank and draw out more money, they developed their own currency substitutes: some people began to use Sterling instead, but it was the cheque that stepped in to keep the economy going. People began to accept cheques from each other, and these cheques began to circulate.

In summary a highly personalised credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalised banking system.

Murphy points out that one of the key reasons why a "personalised credit system" could substitute for cash was the local nature of the circulation -- which, as Michael Linton points out and I make no comment on, was centred on pubs -- so that the credit risk was minimised. The owners of shops and pubs knew their customers very well and so were perfectly capable of deciding whether to accept cheques (or just IOUs) from those customers. And since the customers also knew each other very well, they too could make sensible decisions about which paper to accept.

[Dave Birch] I was at the National Endowment for Science, Technology and the Arts (NESTA) get together, weBank ("can people replace institutions"), as were a number of Forum friends including James Gardner and Giles Andrews, Anthony Evans from BarCampBank and many others. I was really surprised by the turn out, as I had no idea how many people are interested in social banking and such like. There were a lot of different P2P lending organisations and institutions, a wide variety of organisations in the audience, and an interesting overlap with the world of digital money and alternative currencies. The speakers were Giles and James together with Umair Haque and Christian Alhert. (Umair wrote a piece about "next generation currencies" that I was going to blog about before I realised that we was going to be at weBank -- now I'm going to blog about it and podcast him.)

There was a presentation about Zopa which gave an overview. There's no need to repeat it here except to say that the top requests at the moment are for car loans, weddings and (which I have to say I was surprised about) surgery and medical expenses. And a note to the Chancellor: they have only 0.2% bad debt.

There was also a talk from Kubera money, about "rotating savings and credit associations" (ROSCAs) but the chap said he didn't want to give away anything about the company because it was pre-launch so I didn't write anything down. He did introduce some interesting points about the way in which these kinds of credit associations work in existing trusted circles (and therefore don't need to credit check, which saves lots of money) and I thought that might be an interesting subject to explore at a future seminar.

Midpoint & Transfer introduced us to the "foreign exchange revolution". The idea is to match currency buyers and sellers directly and cut out the exchange (and spread) from f/x transactions. It all sounded quite promising -- I worked on a feasibility study for a similar idea for a UK-based financial services company about five years ago, only for a handful of major currencies, but they concluded that it was not something they wanted to pursue -- and I thought their claim that they would guarantee that any f/x would match intraday was bold (it turns out that they will buy the currency needed to make the match if no sellers are on the system).

I enjoyed the panel discussion, because I always enjoy panel discussions that have real experts on them and James, Giles and Umair all made terrific points. A couple of memes that I have flagged for future reflection: the cost of regulation (is it worth it?) and the scaling of social lendin (does it only work on a small scale),

[Dave Birch] When it comes to virtual money, as in so many things, China makes for a fascinating case study. It lacks an efficient online payment system and, together with its somewhat inflexible regulatory framework,this means that there are significant dampers on businesses ability to innovate around payment schemes. There, the results of this unfullfilled market demand has been the development of virtual currencies. These currencies, which were not originally intended for the purpose of generalised online payments, have absolutely exploded over the last few years. The key case study of TenCent is illustrative. They produced a virtual currency called QQ Coins and, as their IM platform dominates the market there, they soon achieved almost universal acceptance. Note that while TenCent has never Iallowed people to exchange the coins back for real money, QQ Coins circulate as "real" money. They are liquid because people have no concerns about the coins being accepted (a bit like Marks & Spencer's vouchers in the UK: everyone will accept them because they know that if they don't want to use them, someone else will).